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Monero XMR: The Decentralized Privacy Coin

Monero (XMR) is a cryptocurrency dedicated to protecting the privacy of its users. As a privacy coin, other users cannot see what your balance is or track where you send money.

According to the original whitepaper, Bitcoin faced many limitations that Monero aimed to address. For example, Bitcoin is not fully untraceable. Through investigation, it’s possible to see exactly who sent Bitcoin to who, even if using an intermediate. Therefore, if personal information is discovered about a single party on the chain, it might be possible to identify other parties who send and receive Bitcoin to this identified entity, if they become compromised in any way. In the original whitepaper, the author concluded that Bitcoin is not an anonymous but a pseudo-anonymous electronic cash system. XMR was born out of a realization of Bitcoin’s limitations, and for a way to achieve true privacy on a public network.

Proof of Work

Monero is secured through a Proof of Work mechanism. This is the same mechanism that secures the decentralized Bitcoin ledger. Through Proof of Work, miners on the network are rewarded with coins when they successfully validate a transaction. This means that whenever a transaction takes place on Monero, miners compete to validate that the transaction is indeed legitimate. This ensures that only valid transactions are added to the blockchain. The mechanism preserves the distributed ledger and ensures it is secure.

Stealth Addresses: Protecting the Recipient of Funds

Transactions between two people are broadcast on the Monero network. Stealth Addresses enhance user’s privacy for transactions. Stealth Addresses are one-time public keys generated for every transaction on behalf of the recipient. This is separate from the recipient’s own unique address on he blockchain and there is no link between the two. Stealth Addresses allow the funds to be sent from one person to another in a completely anonymous way. The money sent to a Stealth Address cannot be linked back to the true recipient in any way.

Ring Signatures: Protecting the Sender of Funds

While Stealth Addresses shield the recipient from being traced to funds, Ring Signatures are designed to protect the sender of funds. To understand Ring Signatures, we can think of a group of people all in a private room together about to sign a cheque. All people have the authority to sign the cheque, but only the person who wishes the make the transaction does so. When the people leave the room and the person hands over the cheque, it’s impossible to know who exactly signed the cheque. The outputs from the room are past transactions of the other people in the room, which act as decoys for the true transaction, and a one-time output spend for the legitimate transaction. To someone investigating the transaction, it would seem that all people in the room are potentially likely to have signed the cheque.

Future Developments:

Ledger had many key wins in 2018 such as hardware wallet support. There are many exciting developments listed in the roadmap for 2019 and beyond, such as second-layer solutions for speed and scalability, as well as additional MRL research papers.